The Impact of Formal Financial Inclusion on Informal Financial Intermediation and Cash Preference: Evidence from Africa

32 Pages Posted: 10 Aug 2018

See all articles by Abidin Alhassan

Abidin Alhassan

University of Waikato- Department of Finance

Leon Li

School of Accounting, Finance and Economics, University of Waikato

Krishna Reddy

University of Waikato - Department of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 26, 2018

Abstract

This paper examines the effect of formal financial intermediation (inclusion) on informal financial intermediation and use of cash for economic activities. Using data from the Global Findex 2014, we examine whether the use of formal financial intermediaries reduces cash preference and the use of informal financial intermediaries. Our empirical results show that informal financial intermediation is positively associated with formal financial inclusion. This indicates that the relation between informal and formal financial intermediation is complementary rather than a trade-off, which demonstrate the importance informal finance play in the financial system of Africa. Moreover, the use of formal financial intermediaries significantly reduces the preference for holding cash, implying that robust financial system infrastructure has the potential of mobilizing excess liquidity in the informal economy of Africa for growth and development.

Keywords: financial intermediation, informal, formal, cash preference, ROSCAs, Tontines, savings clubs

JEL Classification: 012, G2, D2

Suggested Citation

Alhassan, Abidin and Li, Leon and Reddy, Krishna, The Impact of Formal Financial Inclusion on Informal Financial Intermediation and Cash Preference: Evidence from Africa (July 26, 2018). Available at SSRN: https://ssrn.com/abstract=3220250 or http://dx.doi.org/10.2139/ssrn.3220250

Abidin Alhassan (Contact Author)

University of Waikato- Department of Finance ( email )

Private Bag 3105
Hamilton, North Island
New Zealand

Leon Li

School of Accounting, Finance and Economics, University of Waikato ( email )

Private Bag 3105
Hamilton, 3105
New Zealand

Krishna Reddy

University of Waikato - Department of Economics and Finance ( email )

Private Bag 3105
Hamilton, 3105
New Zealand

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